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How to Select the Best Fund Manager?

Fund managers play a key role in management of mutual funds. They are at the helm of activities like asset allocation, research, portfolio tracking and portfolio churning. In layman terms, fund manager is the guy who plays with your money and his credentials play an important role in capital appreciation process. Investor’s entrust fund manager with their hard-earned money, hence it’s crucial to choose him prudently. In this article, we’ll take a look at important parameters that an average investor should consider before making a choice of fund managers.

What to look out for in a Fund Manager?

Common investors are overwhelmed by the number of funds available in the market. It’s so confusing for them to make a choice as all fund houses offer funds of same type and theme. Job gets easier once you start by choosing the fund manager and then the fund. Important points which investors should keep in mind while making the choices are discussed below:

Education and Qualification – Fund manager should be in a position to predict the economic outlook, interest rate scenario, industry trends and company specifics in order to make an informed decision. Before making a choice, do a comparative analysis of education, qualification and industry experience the fund manager carries. Go for the one who is qualified plus carries rich industry experience and preference should be given to manager with industry experience in the same field as the theme of the fund.

Past Performance – Qualification and experience without performance is of no use. Once you have shortlisted few fund managers based on qualification, you should analyse their past performance. Fund manager with superior track record should be preferred over others. A benchmark for superior performance can be three consecutive years of out-performance as compared to peers. You should also analyse the performance at the time of recession. Was the fund manager able to preserve your capital at the time of economic downturn? The answer should always be yes if you are making a choice.

Performance with respect to Index funds – Once peer comparison of past performance is complete, you should check on fund manager’s performance with respect to benchmark index funds. Index funds simply invest in index stocks and their returns are proportional to the index returns. If your fund manager has not generated alpha, i.e. return over and above index funds consistently, then he might not be a good choice.

Roles and Responsibilities – Do check on the roles and responsibility shared by the fund manager while he is managing the fund. Good fund managers focus on research, asset allocation, portfolio tracking and portfolio churning. Fund managers with involvement in other activities that do not contribute directly towards fund performance should not be shortlisted.

Warning signals

Job doesn’t finish once you have made a choice and invested in the fund. Monitoring of fund manager’s performance is equally important. Monitoring will help you identify warning signals so that you can get out at the right time. Investors are recommended to get out once signs of crack appear. Few of the prominent warning signals are:

Three consecutive years of under-performance with respect to benchmark

About Post Author

With 10 years of experience as a consultant in finance, Bimlesh brings with him extensive experience in the areas of research, investment valuation, and financial analysis. Over the years, Bimlesh has also trained extensively in India and overseas. He has trained CFA candidates for the past 3 years. He has served as Principal Derivative Trader and Risk Manager for various individual clients. He is an expert in wealth management, investment advisory and technical analysis and writes for various financial newspapers on topics related to financial planning. He has done B. Tech. from IIT-BHU, one of the premier engineering institutes in India.